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In response to the seventh annual review of Deloitte & Touche LLP’s audits by the Public Company Accounting Oversight Board found audit deficiencies at seven of the firm’s clients, including one that restated its financials in light of the PCAOB’s findings, Deloitte shot back that the board shouldn’t be engaged in Monday morning quarterbacking of well-supported audits.

In a letter included in the report, dated March 26, 2009, Deloitte objected that PCAOB had made those deficiencies public, reminding the accounting-firm regulator that professional judgments may vary over the amount of work that needs to be done for auditing. “A number of the PCAOB’s comments relate to situations in which we believe that the engagement team … made and documented well-reasoned and supported judgments during the audit,” Deloitte wrote. “In our view, such reasonable judgments should be respected and not second-guessed.”

For its part, however, the PCAOB felt that the firm had made significant errors.”Those deficiencies included failures by the firm to identify or appropriately address errors in the issuer’s application of GAAP, including, in some cases, errors that appeared likely to be material to the issuer’s financial statements,” the board wrote in its 2008 inspection report on Deloitte, released today. The PCAOB conducted the inspection of Deloitte between March and November 2008 at the firm’s national office in New York, as well as 24 of its 74 practice offices.

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To be sure, seven clients may not be many in terms of the number of audits looked at by the oversight board. The PCAOB, however, doesn’t specify how many audits it reviewed and discourages readers of its inspection reports from drawing conclusion on a firm’s performance based solely on the number of the reported deficiencies mentioned. “Board inspection reports are not intended to serve as balanced report cards or overall rating tools,” the PCAOB notes.

The PCAOB has accused Deloitte of not doing the audit work needed to properly test a client’s allowance for loan losses and for not fully evaluating another client’s valuation of illiquid securities.

Deloitte takes issue with the PCAOB inspectors’ conclusions in those two instances, saying that its working papers showed that the proper audit procedures were followed and documented. In the case of the illiquid-securities valuation, Deloitte claims its engagement team looked into its client’s — referred to as Issuer G (the PCAOB keeps company names confidential) — valuation by comparing market-pricing data from independent, third-party sources to the issuer’s values. The firm also consulted with its internal valuation experts to review the evidence it had obtained before signing off on the audit.

Nevertheless, the PCAOB included the two instances in its report, writing that, for Issuer G, Deloitte “failed to evaluate the reasonableness of certain of the assumptions related to the underlying information used to develop and support the estimated fair values.”

The PCAOB also cited Deloitte for failing to notice that one of its clients had strayed from following GAAP. Issuer B, which has since restated its financials, had recorded a deferred tax asset for goodwill unnecessarily, going against FAS 109, Accounting for Income Taxes. The rule calls on companies to account for the difference between the book basis and tax basis of assets and liabilities expected to reverse over time. In this case, the issuer accounted for a difference even though there was none.

The PCAOB inspectors concluded that in some instances, Deloitte had not gathered enough evidence to support its audit opinions. The firm has since conducted additional work or supplemented its work papers to satisfy the board’s inspectors.